Effect of Recession on Capital Structure

Running head: EFFECT OF RECESSION ON THE CAPITAL STUCTURE
Capital Structure
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1EFFECT OF RECESSION ON THE CAPITAL STUCTURE
Executive Summary
The aim of the report is to analyse the effect of the capital structure on the financial
performance of an organisation during the time of recession. The primary objective of the
report is to explain the adverse effect of recession on the organisation’s capital structure. The
report also describes the influence of the capital structure in the financial performance of the
organisation.

2EFFECT OF RECESSION ON THE CAPITAL STUCTURE
Table of Contents
Introduction................................................................................................................................3
Review of Literature..................................................................................................................3
Methodology..............................................................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................9

3EFFECT OF RECESSION ON THE CAPITAL STUCTURE
Introduction
The capital structure of a company shows the financing sources applied by the
company for financing the overall financing structure of the company. The capital structure
of the company should be such that allows the application of various sources of financing.
There should be various business factors and macro-economic conditions that should be taken
into consideration for the evaluation of the optimal capital structure of a company. Every
source of financing has its own pros and cons however, the same should be seen from the
business perspective and the business environment under which the operations of the
company is based. The operations and the business environment for a company is not static it
changes as the performance of economy and the level of activity changes in an economy. The
operations of the company also changes with the changing business cycle but it is crucial for
the company to develop strategies and plan which would guide the company in having a
stable business performance. The capital structure of the business is on such key factor
identified that influences the financial performance of a company and the same has been
taken into consideration.
Review of Literature
Capital structure of a company is primarily financed with equity and debt financing,
and the same can be applied in different weights and ratios for supporting the overall
operations and financing activities of the company (Baker & Wurgler, 2015). The debt part
comes from the bond issues or long-term notes payable and the equity part contains the
common stocks, preferred stocks or retained earnings. The capital structure of the company
should not be static and must be in accordance with the changing business and environment
under which it operates. (Vieira, 2017). An optimal capital structure means the capital
consists a balanced proportion of debt and equity. The capital structure depends on the macro